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Jon Feltheimer: Embrace New Economic Models

Jon Feltheimer: Embrace New Economic Models

A few weeks ago, I had the pleasure of taking my oldest daughter, Jillian, for her first day of college. She’s enrolling at my Alma Mater, Washington University in St. Louis, a wonderful school…And Laurie [my wife] and I loved being there with Jillian just to do the simple things for her…To set up her bed, her bookshelves, to meet her roommate…And to join her for her first orientation meeting. As we prepared to say goodbye, Jillian seemed very nervous. She held on to us and didn’t want us to go. Just a few months before, she was that confident high school graduate, enjoying her summer, her friends and her new car. She seemed to have all the answers.

EDITOR’S NOTE: Lionsgate Co-Chairman and Chief Executive Officer Jon Feltheimer was on hand at the annual MIPCOM industry conference at the Palais des Festivals in Cannes, France, to offer a keynote address this afternoon.

But now she was starting over. She was facing new challenges, and she would need to come up with new relationships, new friends and new answers. And I thought, “You know, that’s just like me.”

Every time I think I’ve got this down, something happens and I have to start all over again. Every time I think I have all the answers, it’s time to go back to the drawing board. And every time I’m comfortable that things won’t change, they do. Because the only constant in our business is change.

That’s what I’d like to talk to you about this afternoon: how we look at change, how we respond to it, and how we make it our strength.

Now, when we talk about change in our business, let’s keep two things in mind. First, change isn’t new. Our industry changes each day with each new format, every fresh business model and every newly discovered market. It changes with every single piece of content we produce and distribute. Every show has a different cast, creative team, production schedule and network or cable home. Every one of them operates according to its own creative rhythm, financial and economic calculus and talent architecture. So change is part of our daily life.

But also, let’s remember what hasn’t changed. The demand for content. People are watching more television than ever. The number of viewers is growing, the number of hours is increasing and the number of ways they’re watching is expanding exponentially. The worldwide television market grew to 1.2 billion households last year. Television viewership worldwide reached a record 3 hours 12 minutes of daily consumption… And in the United States, it grew to an incredible 5 hours 19 minutes. Whatever I may think of this number as a parent or taxpayer, it has to warm my heart as an executive. The demand is there, at record levels. The consumers are there, in record numbers. The content is available, in record supply. But what has changed and has us worried is the way people consume content. They view it in large affinity groups or as part of large demographic niche audiences, and they now have multiple viewing choices under the same roof.

Sometimes in our house it still looks like the old days of television. The show that brings the whole family together around the TV set is “Glee.” After “Glee,” the kids scatter to watch their shows, and Laurie and I watch “Mad Men” together. But when she gets to the Kardashians or the “Rachel Zoe Project,” I’m gone and then it really is every man for himself.

Now, we have enough televisions in our house to accommodate this diversity of programming. But around the world, more people are getting the opportunity to see more content than ever before on their cellphones, iPad’s and hundreds of other devices. They want their content when, where and how they want it, and the good news is they’re willing to pay more for it if it’s premium, if it’s faster, sooner, more mobile or more transportable.

In the April-June quarter, the most recent quarter for which stats have been compiled, while cable subscribers are down very slightly, subscribers have bought more premium packages than ever. DirecTV’s profit was up 33% due in part to the growing success of NFL Sunday Ticket, which now has over 2 million subscribers. Now, $320 for NFL Sunday Ticket is a lot of money, but one of the lessons of today’s marketplace is that premium content does command premium value.

So what’s the problem?

Lots of buyers, a growing customer base, major new digital players, an expanding array of services. Add it all up and it doesn’t sound like there is much cause for concern. But in a world where the old advertiser-supported models of big audiences are migrating toward hundreds of affinity niches. Where the traditional, linear progression of windows is increasingly challenged, and the emergence of digital online video is threatening the traditional ways we monetize our content, we have plenty of questions that are keeping us all awake at night.

I can remember when you only needed to create a hit show for one of the three or four broadcast networks in the U.S., a show that would be acceptable to a large, diverse audience. You got one license fee that paid for most of the show, international sales put you in profit, then you did one big syndication deal and you were done. It was a lot harder to make a mistake. There were most favored nation clauses and all kinds of historical deals and precedents to rely on, and you had existing personal relationships on which you could depend. Today, most shows must make a business out of an audience that is far less broad but has far more passion; an audience that will not only watch the show when it premieres, but TiVo it, download it to iTunes, buy it on DVD and watch it on their cell phones. So we need to build new economic models that accommodate this new entertainment paradigm. And, this is where we start getting nervous.

We need to create new relationships, relationships with people who install telephone lines and build mobile networks, relationships with people like billionaire Mark Zuckerberg, 26 years old, who connects millions of people through bits and bytes. And, when we speak to them, we need to monetize these new relationships…and the problem is we don’t know how. What should we charge for our content over these new distribution systems? What about terms? What about exclusivity? There are no precedents, there are no models, there are no defined terms and conditions. So we have to take a chance, we have to take risks, we have to be willing to make mistakes.

Perhaps the best show on television today, “Mad Men,” was a show for which AMC had a tough time finding a studio partner, a hard to finance period piece. But we cobbled together a new business model built on a patchwork quilt of basic cable, DVD sales, iTunes downloads, international sales and a half dozen other digital delivery platforms and we came up with a formula that will ultimately deliver millions of dollars an episode. Some of the ways we finance these new models will cause strain. Our traditional partners may feel encroached upon, their real estate threatened by new players. But, throughout the history of our business, change has inspired existing companies to adapt, and opened the door for new companies to innovate and, at each step of the way, our industry has become bigger and better. Our product is renewable, our businesses are resilient and our consumers’ appetite for content is reliable. And our opportunity is to layer our traditional partners with new partners to build new platforms, define new windows, establish more flexible pricing and ultimately create a win/win scenario for all.

Epix, our new pay television venture with Viacom, Paramount and MGM, is just such a service. For Lionsgate, it was an opportunity to build a valuable and successful pay television channel that would give us control of our own destiny; allow us to monetize the value of our content; get closer to our customers; effectively allow us to exchange lower multiple license fee revenue for much higher multiple equity value.

Epix is working.

It has achieved one of the fastest accelerations from startup to profitability of any channel in history – profitable after only 10 months of operation. And any doubts about its value or willingness to challenge convention were dispelled when we announced our recent deal with Netflix, carving out a new window for streaming movies 90 days after they debut on traditional premium pay television…A deal which media and analyst reports have valued at close to a billion dollars.

The Epix/Netflix deal tells us several things about our business. It tells us that new windows carry a lot of promise and potential for content creators, distributors and consumers alike. It tells us that the digital rights to our content carry tremendous value. And it tells us that, every time we face a market in which traditional buyers are offering less for our content, the financial equilibrium of our business creates new buyers who are willing to pay more.

As we, Viacom and MGM all looked at the paradigm of tying up all subscription pay television rights for a seven-year window in a world of significant and accelerating change, the ability to control and redefine the timing and pricing of these pay windows seemed right for us.

We created the 90-day window after talking with our initial traditional distributors, Verizon, Cox and DISH among them, in order to allow them the early premium window for our films. 90 days later, we expand our footprint via Netflix distribution. So we’ve respected the relationship with historical partners, brought in a new, well-financed digital partner to expand our distribution and ultimately created a business model that will allow us to support our investment in producing high consumer-value content. There’s nothing sacrosanct about the 90 days. We are all exploring new windows and new pricing models, particularly in the VOD space. And even traditional MSO’s are open to new partners in order to distribute their content. I note that DirecTV’s Sunday Ticket is now being made available through broadband for those customers who can’t get their satellite service. And, as part of NBC’s recent estimated $600 million deal with Netflix, “Saturday Night Live” will be made available to Netflix subscribers the day after broadcast.

The Epix/Netflix deal reflects the premium value of our content in a digital world where content companies will have numerous alternatives to get their product to the consumer and to monetize it. When Google, AOL, Microsoft, Yahoo! and other deep-pocketed new media companies are finally able to combine the world of professionally produced content with their enormous online resources and consumer base, they will be formidable competitors… and, more importantly, invaluable partners.

The next challenge in this changing environment is actually figuring out who and where the audience is that will drive our growth.

In the U.S., the audience with the fastest-growing appetite for content is the Hispanic population. The 26 million Latino moviegoers in the U.S. make up more than one-fourth of America’s frequent moviegoers. So, last month we launched Pantelion Films with our partner Televisa to serve this audience. We’re partnering with the largest Spanish language media company in the world, and we’re bringing films to the Latino moviegoer in the U.S. with a consistency and on a scale previously unprecedented – 8 to 10 films a year in English and Spanish for five years.

We’re approaching the venture with the same corporate values we bring to all our initiatives: a dominant world-class partner in Televisa; an entrepreneurial executive team, led by Jim McNamara and Paul Presburger; and delivering branded content to a targeted audience.

The fragmentation of audiences may be difficult news for old world business models. But it is good news for companies like ours because it signals the continued expansion of potentially profitable niches for which our branded content and targeted approach are a better fit. Some of the markets we’re targeting are farther from home. We’re generating only 1% of our nearly $2 billion a year in revenue from the vast consumer populations of China, India and the other Asian territories who make up 50% of the world’s population.

We knew we had to do something else.

So we formed Tiger Gate, a joint venture with Saban Capital Group and my entrepreneurial friends Haim Saban and Adam Chesnoff, to capture a larger share of the fast-growing Asian pay TV market. Led by a trusted and equally entrepreneurial executive, William Pfeiffer, we launched Thrill, a horror thriller channel, and Kix, an Asian action channel. After one year, these channels are up in Hong Kong, Indonesia and Singapore, and we are in negotiations to launch in many other territories. The key to the success of Tiger Gate and any of our other ventures going forward will be the ability to recognize the changing viewing patterns of the audience and develop content, channels and brands that fit them.

When you think about it, these simple rules apply equally to creating successful content in the new world order. If you look at the iconic brands dominating television today, shows like “Boardwalk Empire,” “Burn Notice,” “Breaking Bad,” “Spartacus,” “Californication” and our own “Mad Men” and “Nurse Jackie” all have one thing in common in addition to their loyal audiences and rave reviews— they all average fewer than 5 million viewers, like “Nip/Tuck,” “Monk” and “The Tudors” before them.

But they all represent premium content and they will all have an extended life span in many different markets and windows. These brands are defined as much by the depth of their core audience as the breadth of their popularity.

“Weeds,” our hit show on Showtime, averages about 2 million viewers an episode but, in addition to more than $100 million in DVD revenue, it has also dominated iTunes charts… is available for streaming on Netflix’s Watch Instantly service… and is sold by episode or season on Amazon, Zune, CinemaNow, Movielink and VUDU. Overall, it has already generated nearly five million digital transactions and counting.

Now, it’s a lot harder to make money with a show that has only 5 million viewers than one that has 25 million viewers, but the combination of analog dollars and “digital pennies” adds up pretty quickly. As our business changes, so do all the indices of success. Shows will be prized for the loyalty of their viewers and their ability to migrate to multiple platforms that generate extended revenue streams, not just their ability to reach tens of millions of eyeballs at a single sitting.

As we have seen with Tyler Perry, premium content is distinguishable more by its value as a repeatable brand than by the magnitude of its initial impact. Tyler is one of the most unique talents in the entertainment industry today and, while many of you may not have heard of him, listen to these numbers. 483 million dollars in worldwide theatrical box office for his first nine films. 40 million DVD’s sold of his films and stage plays. 3,000 stage play performances over the past 12 years, attended by 20 million customers. And more than six million weekly viewers for his two TV shows.

The point is that, with a fan base of only 20 to 30 million people, he can be one of the most successful artists and entrepreneurs in the world. Tyler and Debmar-Mercury created a brand new model for his shows that was both risky and different. They took the chance to produce and air ten episodes of his first television show House of Payne with no network attached. And look what they got… an initial 100-episode order for House of Payne and another 100 episodes of its spinoff, “Meet The Browns,” airing first on TBS and then, within two years, airing in an accelerated syndication window led by the Fox station group. In just two years, those orders have grown to 352 total episodes for the two shows. And Tyler’s TV shows alone have generated nearly half a billion dollars in revenue, almost exclusively from the United States. Now, that’s what I call repeatable business.

All of this focus on niche audiences is not to say that the network business isn’t still relevant, and the strong upfront performance this year reinforces that. Shows like “Modern Family” and “Glee” prove that the networks haven’t lost their touch in creating quality, enduring programming, even if the ratings that define a hit today are much smaller than they were 10 years ago. And, if we have learned one lesson already from this year’s network season, it is that content and the Internet continue to intersect in new and interesting ways in the brave new world of television.

The new CBS show, “(Bleep) My Day Says” was taken from a Twitter feed and turned into a hit by one of the few constants in our television business today… find something avant garde, cutting edge, fresh and relevant… and then drop William Shatner into the middle of it. Whether it’s a big star vehicle for 20 million viewers or a niche cable show for 20 thousand fans, the defining constant of content, wherever it appears and whoever its audience, is that it needs to be good. Whether it’s Jerry Bruckheimer making CSI for CBS…Lionsgate producing Mad Men for AMC… or Gustavo Bolivar producing Sin Tetas No Hay Paraiso for Colombian TV…which for some reason has gone on to become a sensation on Latin American television…There are certain rules about content that don’t change.

The first of these rules is, “Get it right the first time.”

If you create the right content, the buyers, sponsors, partners and audience will follow. When you’re making a show, don’t let the results you want to achieve shape the content… let the content shape the results. I remember back fondly to one of the only international co productions done with a U.S. broadcast network, a co-production we did at New World with ABC, TF1 and London Weekend Television called “A Fine Romance.” It was great fun trying to include all of the different voices and, while we got the show on everywhere, it didn’t last long anywhere.

The moral of the story is don’t make a deal— make a show.

When you create a show to fit the structure of a deal or to satisfy the needs of several different markets or to serve the widest possible variety of audiences, the “something for everyone” approach usually leads to nothing for anyone. Now, it’s fine to have shows with lots of buyers as long as they share a unified vision.

“Pillars of the Earth,” which debuted on Starz in the U.S., followed anything but a traditional path to the screen. It was a book that I read and loved over 20 years ago, and it finally made it to the screen because its producers pieced together financing led by licenses to ProSieben in Germany, CBC and the Movie Network in Canada, Sogecable in Spain, ORT in Austria and TV2 in Hungary all before it was attached to a U.S. broadcast or cable network.

“Stanley Park” is a pilot that we produced in the UK for the BBC. Although it’s a fantastic show, its fate remains uncertain in the UK. Shame on you. However, we screened the completed pilot for the Fox Network in the U.S., and they loved it. We just concluded a deal to adapt it to the U.S. market, and the writer/creator, Leo Richardson, is now in Los Angeles working on the pilot script.

These shows have a single, unifying thread — if you make good content in a world marketplace that is hungry for it, you will find plenty of buyers as long as you don’t limit yourself to old models.

Least common denominator television just doesn’t work. The shows with the least longevity and the most limited appeal are often those which, ironically, set out to pander to the widest and most diverse possible audiences. But a successful show in any territory will almost inevitably lead to success in other territories. It will live on in sequels, be sold as a format and will have an afterlife in syndication.

Two decades after its debut on network television, “Seinfield”’s fans and progeny live on in Larry David’s “Curb Your Enthusiasm” which is enjoying a new life with original material created around each episode on our TV Guide network. Forty-two years after its first network premiere, Danno is booking big audiences again as the retooled “Hawaii Five-O” is an early ratings winner for CBS.

From “Bewitched” to “The Fugitive,” “The Honeymooners” to “Get Smart,” the list goes on and the message is clear— get it right the first time and they will come for generations.

Look at the hit series “Modern Family” and “Glee”… while syndication may now be defined more broadly as three or four platforms sharing the back end, these shows amazingly sold into syndication for big numbers in only their second seasons. But when someone else gets it right, don’t expect to duplicate their success by using the same concept and the same formula — because the corollary of “get it right the first time” is me too television doesn’t work.

There are a million great scripts waiting to be written, produced and distributed. Be original, because there is only one “Survivor.” There is only one “American Idol.” There is only one “Sopranos,” and there is only one “Mad Men.”

Great television shows are a testament to the power of a bold idea, conceived with genius and executed with skill. Me too television has no longevity, but fresh, original and daring shows are the gifts that keep on giving when they succeed. There’s one more rule I’d like to talk about that probably applies to all of us. I can remember when I was given the first draft of the pilot episode of “Wonder Years” when I was at New World in 1988. If you all recall, it won an Emmy for best Comedy after only six episodes on the air. I took the script home and read it and shared it with a few close friends whose opinions I trusted, and we all agreed that it was very special.

And then I made one of the best executive decisions I’ve ever made. I left it alone. I didn’t touch the script. I didn’t influence the casting. I didn’t argue with the showrunner’s choice of director. That’s right… I just let the creative process work its magic and stayed out of the way. Sometimes we lose sight of the fact that, as executives, we are only the facilitators of the creative process. We’re not the story, we’re not the audience— we’re the connection between the two. Our job, to bring the storyteller and his or her audience together in the most efficient, effective and entertaining ways possible.

For all the new formats in the world, all the new technologies delivering them and all the new markets for consuming them, our business is still built on stories and the best ways to tell them. What did we learn from this past 3D summer at the theatrical box office? We learned that advanced technology, properly harnessed, can make a good story even better. It can help it achieve its resonance, extend its reach— and, not so parenthetically, boost its profit margins in the process. But even the state of the art in technology cannot make ordinary content extraordinary, and the greatest magic in our creative arsenal remains our storytellers, actors’ and filmmakers’ gifts for capturing our imaginations.

No matter how much our business changes, that simple truth won’t.

Change seems a little scary to all of us, just as it did to my daughter Jillian. And change is hard. Launching Epix, especially in the midst of a recession and in the face of industry skepticism, was difficult. Cracking the Latino moviegoer market and the Asian pay TV market will be tough. Growing TV Guide Network into a leading general entertainment channel is a great challenge. And, cobbling together the various analog and digital revenue streams for the next Mad Men or Weeds will make me long for the simpler broadcast network paradigm of generations ago. But there is no going back, and the status quo isn’t an option for success in a world evolving as rapidly and a business changing as profoundly as ours.

Like the blind men measuring the elephant, we’re still trying to figure out the most basic elements of the digital content equation. But, over time, I am confident that we will get it right…

And we will find the new era of our television business more promising for our companies, more exciting for our consumers and more rewarding for us than anything that has preceded it.

Thank you.

Jon Feltheimer is the Co-Chairman and Chief Executive Officer of Lionsgate.

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